[Good Morning Stock Market] US Stocks Fall Amid Persistent Inflation Concerns... "Limited Impact on Han Stock Market"

All Three Major New York Indexes Close Down About 2%
April Consumer Prices Surge Beyond Expectations
Korean Stock Market Already Priced In Recent Moves... "Impact Will Be Limited"

New York Stock Exchange (NYSE) on Wall Street, New York, USA
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The New York stock market plunged sharply amid persistent inflation concerns. Since the domestic stock market had already reflected such concerns and fallen sharply, the impact on the market on the 13th is expected to be limited. However, it is analyzed that unease will continue until signs of supply normalization appear.

On the 12th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,587.66, down 1.99% from the previous day. This was the largest single-day drop since January 29. The S&P 500 index also fell 2.14%, closing at 4,063.04. The Nasdaq index, which is tech-heavy, closed at 13,031.68, down 2.67% from the previous day.

◆ Ji-young Han, Kiwoom Securities Researcher = The U.S. Consumer Price Index (CPI) for April rose 4.2% year-on-year, significantly exceeding the previous month’s 2.6% and the forecast of 3.6%. The year-on-year increase was the highest since September 2008. While a high reading was expected due to the base effect from April last year, price increases in services such as airlines and hotels due to economic normalization, and rising used car prices caused by new car supply shortages, the inflation surge was larger than expected, intensifying inflation fears.

The unexpected sharp rise in consumer prices has led market participants to doubt the Federal Reserve’s inflation outlook. Although Fed Vice Chair Richard Clarida stated last month that the consumer price increase was surprising but likely temporary, and that the Fed would act if inflation persisted, this has had little impact on the market.

It is true that the perception that supply-side factors such as delayed resolution of the semiconductor shortage and renewed supply chain disruptions due to COVID-19 outbreaks in emerging and Asian countries have driven price increases is dominant. However, considering the strong demand-driven price increases from economic normalization and stimulus effects, it is judged that the inflation surge is not a trend but likely a temporary spike caused by supply disruptions, followed by a gradual inflation moderation.

The domestic stock market is expected to decline influenced by U.S.-originated negative factors stemming from inflation concerns. Many investors remain uneasy about the Fed’s early policy normalization and the early end of the liquidity-driven market. Meanwhile, as major countries including Korea and the U.S. have indices near their peaks, profit-taking desires have increased, acting as a recent market correction driver. However, considering the record-high net selling by foreigners recently and that the recent sharp decline in the domestic market has partially pre-reflected global inflation concerns, the extent of today’s decline is expected to be limited.

◆ Gunhyung Ha, Shinhan Financial Investment Economist = Inflation is more of a burden on financial markets than on the real economy. Even if inflation appears immediately, demand contraction is expected to be minimal. The household savings rate in Q1 was 20%, significantly exceeding the 7% average from 2010 to 2019. Considering government income support measures and recovery in employment and business income, the purchasing power erosion due to inflation is limited.

Expected inflation, calculated from the difference between the 10-year Treasury yield and TIPS (Treasury Inflation-Protected Securities) yield, is in the mid-2% range. Since inflation tends to rise with a lag, there is a possibility of upward pressure on long-term market interest rates due to expected inflation increases.

Concerns about policy normalization are emerging. Last August, the Fed introduced AIT (Average Inflation Targeting), signaling tolerance for a certain level of short-term inflation. Policymakers believe the inflation phenomenon will be short-lived and that price stability will appear in the long term, as consumer inflation perceptions have been limited.

According to the Michigan Survey, 1-year expected inflation rose to the mid-3% range, but 5-year expected inflation remains in the mid-to-high 2% range. The possibility of a Fed policy shift this year is limited. However, if short-term inflation expectations spill over into the long term, concerns about early policy normalization may increase.

Since the risk of fundamental damage is low, this is not a factor for a trend change in financial markets. Nevertheless, concerns about liquidity contraction could increase market volatility. Unease will continue until signs of supply normalization appear.